Brent crude may top $78 a barrel in coming days, not a risk for market yet, say experts

Crude oil prices witnessed healthy gains on March 8 as geopolitical tensions and rising demand supported the commodity prices.

Brent crude futures surged above $70 a barrel on March 8 for the first time since the COVID-19, while US crude touched its highest in more than two years, a Reuters report said.

Brent crude prices have been gaining for four months now and experts believe it can rise to even $78 a barrel in the coming months, as demand rises amid production cuts along with economic recovery picking pace. Geopolitical tensions, too, loom, a risk that could push oil prices higher.

"The fundamentals of crude oil are on the positive side right now. If crude prices sustain at $70, it can go to $78 or even more," said Hareesh V, Research Head Commodities at Geojit Financial Services.

The Organisation of the Petroleum Exporting Countries (OPEC) and its allies have decided to maintain production cuts in April as they wait to see how the demand recovery trends shape in the coming months.

Also read: Check Petrol, Diesel prices in your city: Crude oil price crosses $70 mark

In April 2020, OPEC plus countries agreed to an output cut to reduce the supply glut and to shore up prices.

Kunal Shah, Head of Commodities Research at Nirmal Bang, believes Brent prices may hit the $74 a barrel mark soon. "Because of the ongoing geopolitical tension, Brent may hit $74 a barrel," Shah told Moneycontrol.

India is one of the top importers of crude in the world and an increase in prices negatively impacts the country’s fiscal maths and current account deficit (CAD).

Besides, crude affects a number of industries such as aviation, automobiles, logistics, paints, tyres, etc, as petroleum is a key raw material for them.

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities is of the view that crude prices may remain at elevated levels in the very near future.

However, Oza added that sustained drawdown in global inventories may make it difficult for the OPEC+ curtailments to continue for long.

On the macro front, the rise in trade deficit could lead to some negative impact on the forex reserves and higher inflation which could result in higher bond yields and interest rates.

"We need to sew how RBI manages the rise in bond yields. Government’s FY22 budget estimate numbers have been conservative so any impact of higher crude prices can be absorbed to a certain extent," said Oza.

Crude price may be on an upward trajectory for the short-term but it is not likely to have a strong impact on the market as it is still way below its record high levels. In July 2008, Brent crude prices hit almost $140 a barrel mark.

Market benchmarks Sensex and Nifty ended in the green on March 8.

"At this juncture, I do not see crude prices as a risk for the market," said Pankaj Pandey, Head of Research, ICICI Direct.

"Technically, due to supply cuts and other reasons, oil prices may rise but it may be difficult for it to sustain the elevated levels," Pandey pointed out.

Oza of Kotak Securities believes the rise in crude prices may have some near-term impact on equities but if prices don’t sustain at higher levels then it will be a short-term phenomenon.

"The high growth and V-shaped recovery of the economy could outweigh the negatives of higher crude prices in the long run," said Oza.

"Our forex reserves are strong and FDI+FPI flows are also decent which could allow RBI to manage the currency in a better manner. If rupee does not depreciate materially then the threat of PFI outflows could reduce which could be good for Indian equities," Oza added.

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